Stewart Information Services Corporation — Q1 2021 10-Q
Business context and period. The filing covers the three months ended March 31, 2021, compared with Q1 2020. Stewart provides title insurance and real-estate settlement services, with ancillary businesses including appraisal, search and valuation, and online notarization and closing solutions. Results are unaudited.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Operating revenues | $681.4 million | $445.8 million |
| Total revenues, including investment income and realized/unrealized gains or losses | $688.6 million | $439.9 million |
| Income before taxes and noncontrolling interests | $74.0 million | $9.3 million |
| Net income attributable to Stewart | $54.2 million | $5.2 million |
| Diluted EPS attributable to Stewart | $2.01 | $0.22 |
| Cash from (used in) operating activities | $47.4 million | $(11.4) million |
- Title segment pretax income was $77.1 million versus $14.8 million; pretax margin rose to 12.2% from 3.4%. Ancillary services and corporate recorded a pretax loss of $3.1 million, improved from a $5.6 million loss.
- Cash and cash equivalents were $412.8 million at quarter-end, down from $432.7 million at December 31, 2020. Total assets were $2.04 billion and total stockholders’ equity was $1.05 billion.
- Notes payable were $125.6 million; operating lease liabilities were $123.1 million. The company reported a 12.0% debt-to-equity ratio excluding Section 1031 notes.
- Cash and investments totaled approximately $1.1 billion, or $596.5 million net of statutory reserves. Statutory-reserve assets are not freely available for other purposes. The company reported $223.6 million of available capacity on its credit line at quarter-end, net of an unused letter of credit.
- Title loss reserves were $509.5 million, including $67.8 million for known claims and $441.7 million for incurred-but-not-reported claims. Title loss expense equaled 4.6% of title revenues, versus 4.2% a year earlier.
Material changes and drivers
- Total revenues increased 57% year over year. Operating revenue growth reflected higher direct title and agency activity, as well as acquisitions in ancillary services. Ancillary services revenue rose to $55.9 million from $5.5 million.
- Residential purchase and refinance closed orders increased 35% and 107%, respectively. Non-commercial direct title revenue grew 61%; domestic commercial direct revenue declined 29%, with lower transaction size and volume.
- Title operating expenses increased with higher activity. Employee costs rose 25%, while amounts retained by agencies increased 42%. Employee costs declined as a share of operating revenue, but other operating expenses increased to 18.4% of operating revenue from 16.1%, partly due to acquired appraisal and notary operations.
- Investment income fell 24% to $3.9 million, primarily due to lower interest rates. Q1 2021 included $3.3 million of net realized and unrealized gains; Q1 2020 included $11.1 million of losses. The 2021 amount included a $2.5 million loss on disposal of an equity-method investment.
- Operating cash flow improved from use of cash in Q1 2020, driven principally by higher net income and lower claim payments and accounts payable. Investing cash use was $73.6 million, including $52.6 million for business acquisitions and $16.1 million for an equity-method investment.
Outlook, commentary and risks
- No specific company earnings or revenue guidance is provided. Management said it expected operating cash flows and cash available from underwriters, subject to regulatory restrictions, to fund operations and claims, and described liquidity as sufficient for ongoing needs. It noted that additional financing might be needed for strategic goals, acquisitions or unforeseen circumstances.
- Management cited industry forecasts for Q2 2021 of higher home sales and purchase lending but lower total mortgage originations, reflecting expected refinance declines. The company noted that mortgage rates were beginning to rise. These are cited industry expectations, not company guidance.
- The company continued pandemic-related business-continuity measures and was evaluating its return-to-work approach. Management emphasized technology, automation, cost control and integration of recent acquisitions as operational priorities.
- The $350 million unsecured credit commitment was increased from $200 million and extended to March 2026. The amendment also increased certain restricted-payment and additional-debt limits and removed the annual capital-expenditure limit.
- Principal disclosed risks include changes in real-estate and mortgage activity, interest rates, title claims and reserve estimates, regulatory restrictions on insurer distributions, litigation, competition, acquisitions and integration, and the continuing effects of COVID-19. Management said ordinary-course legal and regulatory matters were not expected to have a material adverse effect; outcomes remain uncertain.
- Recent acquisitions included A.S.K. Services, a title search and support provider, and Signature Closers, an online notarization and closing provider. Purchase accounting remained preliminary and was expected to be finalized in the second half of 2021.
Important facts for investors to verify
- Whether elevated purchase and refinance order volumes persist, and how higher mortgage rates and transaction mix affect revenue and fees.
- Whether acquired ancillary businesses sustain growth and improve profitability after integration, including the effect of amortization and operating costs.
- Development of title loss provisions, claim payments and the substantial IBNR reserve, given the judgment required in estimating ultimate claims.
- Cash available to the parent after statutory-reserve requirements and regulatory limits on distributions from the title insurer.
- Final purchase accounting for the acquisitions and any material developments in legal, regulatory or pandemic-related matters.